Geithner: Fannie and Freddie Favor Loan Write-Downs

Treasury Secretary Timothy Geithner said Wednesday he believes that mortgage giants Fannie Mae and Freddie Mac favor writing down loan balances for troubled U.S. homeowners, despite resistance from their regulator.

Geithner’s remarks at a Senate subcommittee hearing add fuel to an ongoing debate over whether the government-controlled mortgage finance firms will reduce loan balances. They also highlight frustration among top Obama administration officials about their inability to influence the regulator of the mortgage giants, the Federal Housing Finance Agency.

“I think Fannie and Freddie themselves are actually pretty supportive of this,” Mr. Geithner said. Their regulator, he said “has been a little more conservative.”

The Obama administration has stepped up pressure on the regulator for Fannie and Freddie to grant reductions, which it doesn’t currently allow. In January, officials said they would triple the amount of taxpayer money that investors — including Fannie and Freddie – receive when they reduce loan balances.

The housing regulator, along with executives at Fannie and Freddie, has been evaluating the incentives the administration has offered. But the agency’s acting director, Edward DeMarco, has resisted doing so, saying that it may not make economic sense for Fannie and Freddie and could encourage more borrowers to default.

An FHFA spokeswoman did not comment on Geithner’s remarks but said the agency plans to make a decision on the incentives next month. Representatives of Fannie Mae and Freddie Mac declined to comment.

Mr. Geithner’s remarks underscore how tensions between the administration and Mr. DeMarco have grown in recent months.

“We have been encouraging Fannie and Freddie to take another look at the math, the economics of it,” Mr. Geithner said. ”We think there is a strong case in some circumstances to add principal reduction as part of their strategy to maximize return to the taxpayer.”

Fannie and Freddie were put under federal control in September 2008, a takeover that has cost taxpayers $151 billion to date. But Mr. Geithner’s remarks showed how the FHFA’s independent status has frustrated top officials.

“We’re limited to the power of our persuasive abilities,” Mr. Geithner said. “If Congress were to change that balance of authority I would welcome that.”